Preference shares: analysis of Shari'ah issues

Abstract
Purpose – The purpose of this paper is to analyze the different features of preference shares from
accounting and Sharīʿah perspectives. It also aims to study Sharīʿah issues arising from preference shares and
to subsequently propose solutions for identified issues that will help in structuring Islamic preference shares.
Design/methodology/approach – The paper uses a qualitative method by analyzing relevant
documents and literature to understand the subject matter and Sharīʿah-related issues.
Findings – The paper finds that several features of conventional preference shares, such as capital
guarantee, loss sharing disproportionate to capital contribution, fixed profit, profit guarantee and waiver of
rights before realization of profit, make thema Sharīʿah non-compliant instrument.
Research limitations/implications – The paper is conceptual in nature; however, it provides
directions for future empirical research.
Originality/value – The paper provides a practicable solution to structure Sharīʿah-compliant preference
shares.
Keywords Equity, liability, debt, capital guarantee, preference shares
Paper type Research paper
Introduction
From their original feature of mere preference in dividend distributions (Evans, 1929),
preference shares have evolved significantly to the present time with a range of other rights
granted to their holders. In financial reporting based on International Financial Reporting
Standards (IFRS), a preference share can be classified as an equity or a liability instrument,
or even as a compound instrument, comprising both equity and liability components. These
classifications depend on the rights of preference shareholders and the obligations of the
issuing entity, and there is no one classification that fits all. One common feature is that
preference shareholders have a prior claim over ordinary shareholders on the issuing
entity’s distributable earnings and on net assets at the time of liquidation (Bursa Malaysia,
2017), but they are subordinate to bonds and other types of debts. The preferential rights
over ordinary shares raise concerns from a Sharīʿah standpoint about the classification and
acceptability of preference shares.

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